Does the New FTC ‘Biz-Op’ Rule Cover Internet ‘Make-Money’ Schemes?

Written by William I. Rothbard on Wednesday, April 4th, 2012

Most antiquities remain forever relics of the past, irrelevant to the present except as objects of interest and amusement. Such had seemed to be the case with the FTC’s dusty old Business Opportunity (“Biz-Op”) Rule, but no more. Once confined to the realm of vending machine businesses and the like, and limited to biz-ops costing at least $500, the rule has been broadened to cover sellers of “work-at-home” opportunities carrying no purchase minimum.

Could these include Internet “make-money” schemes (like “turnkey” web stores, or how to make money on Google or through social media marketing)? The answer, if yes, could have huge implications for the viability of Internet biz-op marketing given the onerous disclosure requirements of the rule.
“Business opportunity” is defined, in pertinent part, as a solicitation to start a business in which the seller offers to “provide outlets, accounts, or customers, including … Internet outlets, accounts, or customers, for the purchaser’s goods or services.”

“Providing outlets, accounts or customers” means, in pertinent part, “requiring… recommending …[or] “providing a list of…[or] collecting a fee on behalf of … lead-generating companies…or otherwise assisting the prospective purchaser in obtaining…outlets, accounts, or customers.” It does not include providing “advertising and general advice about business development and training.”

The FTC document explaining the Biz-Op Rule hardly discusses Internet-based work-at-home opportunities, yet the explicit inclusion of “Internet outlets, accounts, or customers” within the definition of “business opportunity,” and identification of “lead-generating” support as one form of covered seller assistance, leaves no doubt of the FTC’s intention to enforce the rule against Internet make-money schemes it believes are violating the Rule and can fit within the business opportunity definition. The commission already has identified online biz-ops as a prime enforcement target in its campaign to protect the “financially distressed” consumer and has brought a number of cases against them, including one involving a turnkey web-store business that recently went to trial and is awaiting decision in FTC v. Commerce Planet.

To the extent such digital stores are deemed to be “outlets” or “accounts,” and helping Internet biz-op purchasers to get leads is deemed to be “providing customers,” then the rule will apply and the FTC will have a powerful new weapon to deploy in the online marketing arena.

At its core, the new rule is a disclosure regulation, requiring detailed written disclosure, in a prescribed form, of certain material information, including the basis of earnings claims – the sine qua non of biz-op offers. A covered seller must disclose, at least seven days prior to sale: who it is; whether it’s making an earnings claim; whether it, its affiliates, or key personnel have been involved in any legal actions; whether it has a cancellation or refund policy; and a list of purchasers within the last three years. If the seller makes earnings claims, has been involved in legal actions, or has a cancellation or refund policy, it must provide supplementary information substantiating the earnings claims, identifying the legal actions, and stating the key terms of the cancellation/refund policy.

Obviously, a 7-day advance disclosure requirement of this scope and depth is incompatible with the sale of biz-ops by direct response marketers “as we know it,” online (or off). We will know soon enough, through FTC enforcement actions and/or further guidance, what types of Internet make-money schemes it believes fall within the scope of the new Biz-Op Rule (violation of which carries a $16,000 penalty per instance). Meanwhile, online biz-op sellers: beware of your potential exposure and proceed with care.